Oil thirst rising as Iraq unrest boosts prices

Jun. 13, 2014
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Militants parade down a main road in Mosul, Iraq, on June 11, 2014. Iraqi officials say al-Qaeda-inspired militants who this week seized much of the country's Sunni heartland have pushed into an ethnically mixed province northeast of Baghdad, capturing two towns there. / AP

by Wendy Koch and Gary Strauss, USA TODAY

by Wendy Koch and Gary Strauss, USA TODAY

As Iraq's mounting unrest pushes crude oil prices to their highest levels this year, a report Friday predicts that global oil demand will increase, but Iraq's supplies may not be at "immediate" risk.

"Concerning as the latest events in Iraq may be, they might not, for now, if the conflict does not spread further, put additional Iraqi oil supplies immediately at risk," the Paris-based International Energy Agency said in its monthly oil market report.

The IEA, which does autonomous energy research and forecasting for 29 member countries, noted that most of Iraq's fighting has occurred in its northern areas, where oil production has largely stalled since March. Most of Iraq's production - which recently hit a 30-year-high - has occurred in the south, and its exports are coming from terminals near Basra.

"While Iraq's production potential is huge, so are the political hurdles it is facing," the IEA says, noting the significant gains that Sunni insurgents have made in the country's north since launching a military campaign earlier this month. The Islamic militants, after taking control of the northern cities of Mosul and Tikrit, have said they will march on Baghdad.

The turmoil in Iraq pushed up U.S. and world oil prices about 4% this week. The U.S. benchmark crude oil, West Texas Intermediate, closed at $106.91 a barrel, up 38 cents on Friday. Brent, the international benchmark, rose 31 cents to $113.41.

The IEA has forecast that Iraq, which has the world's fifth-largest proven oil reserves, would account for 60% of production growth from the Organization of Petroleum Exporting Countries for the rest of this decade. Iraq, now producing about 3.3 million barrels a day, has become OPEC's second-largest producer, after Saudi Arabia.

Even if the fighting stays in Iraq's north, the IEA sees an impact. It says the unrest makes the reopening of a key pipeline from Kirkuk in Iraq to the Mediterranean port of Ceyhan in Turkey "look even more elusive." It has been out of use since March because of sabotage.

This uncertainty comes as the IEA expects global oil demand, which affects both oil and gasoline prices, will rise from 91.4 million barrels per day in 2014's first quarter to 94 million during its last three months.

"The question is, who is going to fill the gap? Saudi Arabia? That's what the market is looking at,'' says John Kingston, global news director for industry tracker Platts Energy.

Oil and gas infrastructure in the Iraq's north "will be vulnerable to repeated attack, and the risk of disruptions to domestic product supply is high," Raad Alkadiri, a senior research director at IHS Energy, a consulting firm, said in a statement. Still, he doubts southern production and exports will be "directly affected."

By itself, Iraq's turmoil may have limited impact, but coinciding with Russia's annexation of Crimea and Libya's instability, it "points to a systemic and seismic shift geopolitically," Edward Morse, head of commodities research at Citigroup, wrote in a report Friday. He said the rise of a wider Islamic banner, bringing Iraq and Syria closer together, could "pose physical challenges to the maintenance of borders laid down nearly a century ago."

Higher oil prices could set the stage for a spike in gasoline prices, already on the rise. While gasoline averaged $3.58 a gallon between Memorial Day and Labor Day last year, retail prices have averaged about $3.65 for the past month.

Oil price increases are likely to drive the price of regular unleaded gasoline up 5 to 10 cents per gallon in the coming days and keep summer prices elevated, says Tom Kloza, senior energy analyst at Gasbuddy.com.